Focusing on 4-digit costs that are framed as a percentage of your purchase.
Whenever you read an article about saving money, usually items like “stop buying Double Chocolaty Chip Crème Frappuccino Blended Crème coffee at Starbucks” are high on the list. That is a real drink, and doesn’t it sound delicious? If you are visiting Starbucks three times a day, then you might want to consider cutting back. But if you enjoy visiting a Starbucks patio on a Saturday morning to read a newspaper (remember those?), I think it will be okay. This sounds like a relaxing time for you. It’s time we revisit our grandparent’s motto: “Don’t be penny-wise and pound-foolish.”
We can create a stressful environment for ourselves being “penny-wise”. If you spend your time and energy visiting 10 different stores to save $3 on a pair of flip-flops or $2 on laundry detergent, then it may be time to reconsider the long-term savings on this effort. What is the value of your time? Or possibly you’ve had the experience of choosing the cheaper item in an effort to save money, just in time for it to break a week later? You may have heard another old phrase, “buy it right or buy it twice”.
When is it time to invest the time and energy to save money? I would argue the answer is when the savings reach 4 digits. If we are talking about a difference of thousands of dollars, it’s time to pay very close attention. The largest purchases in your life make the difference and there’s especially a major need to pay attention to a cost that is framed as a percentage. For example, paying 6% commission on a real estate transaction doesn’t sound like much. However, paying 6% on a real estate sale of $500,000 amounts to $30,000. Now we are talking real numbers. Realtors work very hard and bring valuable knowledge to the table, but you may want to pay very close attention to this percentage cost.
Another example is paying a financial advisor a percentage of your investments. If you are paying a 1% fee on a $2,500,000 portfolio, that equates to $25,000/year. I would suggest asking the advisor for an estimate of ongoing hours spent managing your assets. If the answer is 25 hours/year, you are effectively paying that advisor $1,000/hour. Does that seem appropriate or egregious to you? Or possibly paying a 6-8% commission on purchasing a financial product (such as an illiquid REIT). If you “invest” $500,000 in the product, then the advisor has effectively earned $30,000-$40,000 on the transaction. I’ll let you calculate that hourly rate.
Another example is taking out student loans. I’m aware that the student loan industry gets picked on often, and for good reason. For example, if you are planning to attend the University of Denver Law School for the next 3 years, your direct and indirect costs amount to $76,082/year. Assuming 3 years of law school, the cost is approximately $228,246 (let’s just pretend for a moment that the cost doesn’t increase while you are in school). According to current interest rates, the graduate loan interest rate is about 7%, which is interest of $15,977/per year. Back to our rule of paying very close attention to anything that has 4 digits. Is it worth the investment in your future? I’ll leave that up to you to decide.
Other big-ticket items are car purchases or car leases. If your father-in-law is as aggressive as mine when it comes to negotiating at the car dealership, you can save thousands of dollars. It may not be a comfortable process, though. I would argue this is a time when it would make sense to visit multiple dealerships and do lots of online research (maybe even while sipping on your Starbucks – hey, whatever helps you get through it) before even starting the search process.What are your thoughts? Any other 4-digit savings you can think of? Call IMPACTfolio at 844-218-3800 if you would like the help of a financial planner to evaluate the 4-digit savings in your life.
Julie Fletcher McDaniel, CFP®, has been in the financial services industry since 2006. She is a co-founder of IMPACTfolio, a wealth management firm that specializes in IMPACT investing and holistic financial planning for one flat-fee.